as large a proportion of his income in the form of money.  If, however, there is a concerted movement to spend the surplus money, there results a general bidding down of the value of money, a general bidding up of the prices of goods.  At what point will this movement stop?  The rational conclusion must be that, other things being equal, the new equilibrium will be established when the ratio between the value of money and the price of the goods which each individual is purchasing becomes the same as before.  The money being doubled, prices must be doubled, and likewise for any other change in quantity.

Sec. 10. #The quantity theory of money.# This explanation of the effect of changes in the quantity of money in a country upon prices (the general scale of prices) is known as the quantity theory of money.  This theory has, for a century, been very generally accepted by competent students of the money problem.  It may be summed up thus:  other things being equal, the value of the monetary unit, expressed in terms of all other commodities, falls as the quantity of money increases, and vice versa.  That is, prices rise and fall in direct proportion to changes in the total quantity.  This is a simple explanation of a complex and difficult set of conditions.  The phrase, “other things being equal,” betokens the statement of a tendency where there are several factors.  The quantity theory explains what happens when there is a change in one of the factors—­the number of pieces of money.  There are three large sets of facts to be brought into relationship with each other in the quantity theory:  (1) the amount of business, or the number of trades effected; (2) the rapidity of circulation, depending on the methods by which business is done; (3) the amount of money available.  According to the quantity theory we must expect that, when conditions (1) and (2) remain fixed, the value of money will vary inversely as its quantity.  This quantity theory may be expressed in the formula P = MR/N when P is the symbol for price, or the general price level, N is (1) above, R is (2), and M is (3).  P, therefore, changes directly with either M or R, or inversely with N.[6]

Sec. 11. #Interpretation of the quantity theory.# The quantity theory must be carefully interpreted to avoid various misunderstandings of it that have appeared again and again in economic discussion.

(1) It does not mean that the price level changes with the absolute quantity of money, independently of growth of population and of the corresponding growth in the volume of exchanges.

(2) It is not a mere per capita rule to be applied at a certain moment to different countries.  For example, Mexico may have $9 per capita and the United States $35, while average prices may not differ in anything like that proportion.  But in these two countries not only the amounts of exchanges per capita but the methods of exchange and the rapidity of the circulation of money differ greatly.[7]